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Managerial Economics

Managerial Economics. Central Proposition: Decision Making Is At The Heart of Most Individual, Business, & Government Problems Important Decisions Warrant Serious Analysis. Chapter 1: Introduction to Economic Decision Making. Text Topics 1 Profit Analysis (Chapters 2-6).

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Managerial Economics

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  1. Managerial Economics Central Proposition: Decision Making Is At The Heart of Most Individual, Business, & Government Problems Important Decisions Warrant Serious Analysis Chapter 1: Introduction to Economic Decision Making Text Topics 1 Profit Analysis (Chapters 2-6) 2 Market Structure & Competitive Strategy (Chapters 7-10) 3 Regulation and Public Goods (Chapter 11) 4 Decision Making Under Uncertainty (Chapters 12-14) 5. Applications (Chapters 15-17)

  2. 1.2 DECISION EXAMPLES • 1. Multinational Production and Pricing • 2. Market Entry • Building a New Bridge • A Regulatory Problem • An R&D Decision • Wooing David Letterman

  3. 1.3 ANALYZING DECISIONS : SIX STEPS Who is the decision maker? What is the problem? 1. Establishing the Context 2. What is the Objective? 3. What are the Alternatives? Maximum Profit or other Goal? Uncovering and maximizing Options Forecasting Revenues and Costs 4. Predicting Outcomes 5. Making a Decision 6. Sensitivity (What If) Analysis Marginal Analysis, D-Trees, Game Theory What About New Conditions? What Drives Decision?

  4. 1.4 OBJECTIVES & TRADEOFFS Firm’s Objective: Maximum Profit Societal Objectives: Maximal Welfare (Benefits - Costs) Government regulatory initiatives and Macroeconomic policies Economic Tradeoffs Conflicting Goals Automobile Regulation: Safety, Emissions, Fuel Economy Benefits versus Costs Long-Term versus Short-Term Risk versus Return

  5. 1.5 DECISION MAKING UNDER UNCERTAINTY Distinguishing between: Good Decisions and Good Outcomes Decision Steps Assessing Possible Outcomes Quantifying Uncertainty Acquiring and Interpreting New Information Determining whether Risks are Acceptable

  6. 1.6 LOCATING A SHOPPING MALL 15 10 10 10 5 20 10 15 | | | | | | | | A B C D E F G H 3.0 3.5 2.0 2.5 4.5 2.0 4.5 What location Minimizes Total Trip Miles? Town E (at the Median of the Customer Distribution) Finding the Best Hotel Three Hotels. Traveler can visit and compare but cannot go back. Strategy: Size up the 1st Hotel but bypass it. Stop at the 2nd Hotel only if its better than the 1st. B B M M W W M W B W B M W M W B M B Traveler finds best Hotel 1/2 the time!

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